Your money grows during your working years, postponing taxes until you need your money in retirement.

Tax-free transfers
In a variable annuity, money can be moved among investment options without being taxed. This enables you to adjust your investment strategy as your goals or market conditions change.

Keep your money growing in retirement
Even after you retire, your money can continue to grow tax deferred until you need it. Unlike a 401(k) plan or traditional IRA, you are not required to begin taking your money by age 70½ (unless your annuity is held in a qualified plan). Annuity distributions are not generally required until age 90 (this rule is based on the specific contract requirements and can vary).

Withdrawing your money
If you withdraw money during the early years of the accumulation phase (usually during the first seven or eight years of the contract), the issuing company may keep a certain percentage of your withdrawals (called a withdrawal charge) to cover the cost of issuing the contract. Be sure to carefully read and understand the terms of your particular contract before purchase. When withdrawn earnings are taxed as ordinary income, and if you're not yet age 59½, there may be an additional 10% federal income tax penalty. (See costs and fees of annuities)

This chart illustrates the effect of long-term performance on the value of an annuity, using two hypothetical $50,000 tax-deferred investments over a 25-year period, one earning 8% annually and the other earning 0%. After 25 years, the investment earning 8% would grow to $342,424 before taxes, while the investment earning 0% remains at $50,000.

With a lump-sum withdrawal, an investor would receive $245,924 after taxes, assuming a 33% tax bracket. The 0% investment would still be valued at $50,000.

For an investor choosing systematic withdrawal at $5,000 per month after taxes, assuming a 28% tax rate, the contract value of the 8% investment would fund payments through the 5th year, compared to 10 months for the investment earning 0%, based on the following assumptions: Withdrawals begin after the investor has reached age 59½, and are assumed to occur at the beginning of each month. Earnings on the remaining balance of the contract continue to grow at 8% or 0%, respectively, for the entire month.

The annuitization example is based on a single life with 10-year certain for a 65-year-old man and a 28% tax rate. The contract that earned 8% during the accumulation phase would result in a monthly after-tax payment of $1,312 for life, while the contract that earned 0% would result in a monthly after-tax payment of $255 for life.

These rates of return are hypothetical, and are not intended to serve as projections of the investment results of any specific annuity. This example doesn't include the effect of charges and expenses. Had charges and expenses been included, the results would have been lower.